UK now has smaller economy than France

The fall in the pound means Britain's economy is now significantly smaller
than France's and could soon be overtaken by Italy.

UK now has smaller economy than France Photo: GETTY

By Edmund Conway, Economics Editor

12:21AM GMT 28 Oct 2008

In dollar terms, Britain's economy is now in sixth place in the world rankings, behind the US, Japan, Germany, China and France. It comes as the pound sinks to a new 12-year low, amid growing concerns for the health of the UK economy.

Sterling dropped by almost 4 cents to $1.5468 yesterday as speculation mounted that the Bank of England's Monetary Policy Committee will slash rates at its meeting next week – or even before – and that the Government is planning a large-scale Keynesian-style stimulus package for struggling households.

The pound also sank to 85.5 points on its trade-weighted index, which compares it with a variety of trading partners. It is the lowest level since 1996.

The fall in sterling has a dramatic effect on the comparative size of the UK economy, as when international statisticians compare country sizes they do so in dollar terms. In the second quarter the UK's GDP was worth £363.8bn. At that point, with the pound strong at around $2, this equated to $727bn – narrowly ahead of France. However, at today's exchange rate, UK economic output from the same period is worth just $559bn, compared with $606bn in France and $494.7bn in Italy.

At the start of the year, the UK was ahead of France, so news that, due to the pound's fall, Britain has now dropped uncomfortably close to Italy will be highly embarrassing.

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Sterling neared a fresh all-time low against the euro yesterday, underlining the scale of its fall in recent months. The currency has fallen out of favour as evidence mounts that the UK is already in recession. The Office for National Statistics reported last week that the economy shrank in the third quarter for the first time since 1992. European countries are due to publish their own growth estimates in the coming weeks. The GDP fall prompted the biggest intra-day fall in sterling since comparable records began 37 years ago.

Lutz Karpowitz, currency strategist at Commerzbank, said: "Whenever recession fears become the main issue, the pound depreciates. The pound is in a very uncomfortable position."

Many expect the currency to fall beneath $1.50 in the coming weeks.

Gordon Brown indicated that the Bank of England has scope to cut interest rates, as inflation drops from its recent peaks, sparking expectations that a reduction in borrowing costs by half a percentage point or more is imminent. The Prime Minister also pledged to borrow more and spend more to keep the economy afloat as the recession intensifies.

Chancellor Alistair Darling is expected this week to insist that although public borrowing over the past six months reached a record post-war high, he has not lost control of the public finances.